A plurality of investment strategies are known and used by investors. Pure long strategies invest in stocks, bonds, real estate or other financial instruments that are expected to appreciate in value. One method is to invest in financial instruments that model an index such as the Standard and Poor's 500 Stock Index or the Dow Jones Industrial Average. Another method is to invest in one or more financial instruments that are expected to appreciate in value faster than the indices. A variety of techniques are used to select these financial instruments ranging from analysis of chart patterns of price and volume history for each instrument to fundamental analysis and projections of the underlying business of the company represented by the instrument. These methods are referred to as being long or taking long positions.
Another method of investing seeks to benefit from financial instruments that are expected to decrease in value. In this method, instruments are borrowed and sold in the expectation that the borrowed instrument can be purchased and returned in the future at a lower price. This technique is referred to as selling short or taking a short position. This short selling technique is commonly used by hedge funds. Short selling generates a cash position, and the investor can earn interest on this cash.
When the value of the financial instruments that an investor holds is greater than the amount of capital being invested, the investor's position is “leveraged.” The use of leverage is common for long, short or combined investment strategies. The amount of leverage can be expressed as the ratio of the total value of long and short investments to the capital invested, expressed as a percent. Thus, if $100 is invested to purchase $100 worth of financial instruments and to sell short $100 worth of instruments, the leverage is 200%. Such a portfolio is described as being 100% long and 100% short. If an investment manager is successful at choosing better performing longs and/or shorts, the use of leverage can multiply the return for the investor.
Some investment strategies combine both long and short positions. This allows the investment manager to take advantage both of opportunities that are undervalued and opportunities that are overvalued as compared to the overall market.
The particular instruments to be purchased or sold short may be selected by a variety of techniques for predicting expected returns. One family of techniques relates to the analysis of charts of the historical stock movements and their volume. Some investors believe certain patterns on such charts are predictive of future price movements. These techniques are sometimes referred to as technical analysis or charting techniques.
Another family of techniques relates to fundamental analysis of the business issuing the financial instrument. The business is modeled and future earnings and/or dividends (if any) are projected. Using a discount rate, the dividend stream and terminal value of the enterprise are converted to a present value and compared to the market price.
Other techniques reflect the value of stocks compared to peers using factors such as earnings and dividend growth, dividends, price to earnings ratio, and price to book ratio. Still other techniques fall in the category of momentum analysis, selecting the financial instruments that seem to be moving most favorably. Other factors such as insider trading patterns can also be utilized.
The above-listed and other factors are often combined into mathematical or computer models that can be used to predict the best and worst performing financial instruments. Such modeling methods are typically referred to as quantitative methods.
Thus, such computer models typically use past behavior of the financial instrument to predict future behavior. However, such models are limited because they do not analyze the current value of the underlying business, including its tangible assets, and its capability for expansion of its assets as compared to its competitors. Moreover, such models do not analyze the capability for expansion in light of the current price of the financial instrument.
What is needed is a method of ranking financial instruments for companies based on each company's net asset value as modified by the company's capacity to expand its operations.
A need exists for a method of determining whether a financial instrument is selling at a premium or a discount to the market based on the modified net asset value for the company to which the instrument pertains.
A further need exists for a method for determining an investor's market exposure based on the ranked financial instruments and the current value of the market as a whole as compared to a historical average.
The present disclosure is directed to solving one or more of the above-listed problems.